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Idea Cellular: A good end to FY15

May 12, 2015

Idea Cellular has declared the results for the fourth quarter and full year 2014-2015. The company has reported a 19.6% YoY increase in total revenues and a 59.7% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary

Consolidated sales grew by 19.6% YoY during 4QFY15. Growth was led by a 16.2% YoY increase in total subscriber base as well as a 17.8% YoY growth in total minutes billed during the quarter.

Mobile subscriber base grew by 6% QoQ during the quarter. Total count of VLR subscribers crossed the 160 m mark and stood at around 161.4 m at the end of March 2015.

Operating margins improved to 36.4% in 4QFY15 from 31.6% seen during 4QFY14.The operating profit increased by 37.5% YoY.

Net profit increased by 59.7% YoY during the quarter. This was due to the good operating performance as well as an over four fold YoY jump in other income during the quarter. Net margins improved to 11.2% as compared to 8.4% during 4QFY14.

The company has declared a final dividend of Rs 0.6 per share.

Consolidated financial snapshot

(Rs m)

4QFY14

4QFY15

Change

FY14

FY15

Change

Sales

70,438

84,225

19.6%

265,189

315,709

19.1%

Expenditure

48,155

53,580

11.3%

182,269

207,592

13.9%

Operating profit (EBITDA)

22,283

30,645

37.5%

82,921

108,117

30.4%

Operating profit margin (%)

31.6%

36.4%

31.3%

34.2%

Other income

452

1,864

312.5%

2,268

4,697

107.1%

Interest expense/(income)

2,399

2,917

21.6%

9,552

10,452

9.4%

Depreciation

11,380

14,877

30.7%

45,194

53,036

17.4%

Profit before tax

8,956

14,715

64.3%

30,443

49,325

62.0%

Tax

3,058

5,298

73.2%

10,765

17,396

61.6%

Net profit

5,898

9,418

59.7%

19,678

31,929

62.3%

Net profit margin (%)

8.4%

11.2%

7.4%

10.1%

No. of shares

3,598

Diluted Earnings per share (Rs)*

8.9

P/E ratio (x)*

19.3

* On a trailing 12 months basis

What has driven performance in 4QFY15?

Idea reported a 19.6% YoY growth in its revenues during 4QFY15. The growth was led by the 16.2% YoY growth in VLR subscriber base as well as the 17.8% YoY increase in the minutes of usage (on an aggregate basis). The improvement in the realized rate per minute (ARPM) continued in 4QFY15. The ARPM increased by 1.5% YoY. However, the ARPM is being driven by data pricing rather than voice rates. The average revenue per MB or data ARMB grew by 1.6%YoY whereas the voice ARPM fell 7.1% YoY.

Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) increased to Rs 179 per month from Rs 173 seen during the same period last year. However, on a sequential basis it was flat. During 4QFY15, the average rate per minute (ARPM) stood at 44.8 paisa, which was higher than the 43.6 paisa seen during both 4QFY14 as well as 3QFY15. The minutes of usage (MoU) on a per subscriber basis stood at 400 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 388 and 397 respectively.

Key indicators

4QFY14

4QFY15

Change

Revenue (Rs m)

70,438

84,225

19.6%

Subscribers (m)

135.8

157.8

16.2%

ARPU (Rs)

173

179

3.5%

Minutes billed (m)

157,055

185,028

17.8%

Revenue per minute (Rs)

0.45

0.46

1.5%

EBITDA (Rs)

22,283

30,645

37.5%

EBITDA margin

31.6%

36.4%

EBITDA per minute (Rs)

0.14

0.17

16.7%

Idea's operating margins stood at 36.4% during 4QFY15, as compared to 31.6% in 4QFY14. This sharp improvement in margins was largely driven by savings in network expenses and access charges (both as a percentage of sales). However, it must be emphasized that seasonally, the fourth quarter usually does not see much of an increase in network expenditure.

Net profits grew by 59.7% YoY during quarter due to a good performance at the operating level and the jump in the other income figure. Consequently, net margins stood at 11.2% in 4QFY15 as compared to 8.4% seen in 4QFY14.

What to expect?

At the current price of Rs 171.45, the stock is trading at a multiple of 19.3 times its trailing 12 month earnings.

Idea Cellular had a very good year in FY15. The quarter gone by saw a record number of subscriber additions. The management stated that they too had not expected such growth. The larger than expected subscriber additions along with the boom in data consumption has largely been responsible for the solid topline performance.

However, it must also be said here that FY15 witnessed a slowing down of the competitive intensity along with a concerted effort by telcos to wind up many types of promotional offers. This had resulted in a temporary increase in pricing power. However, it is now clear that none of the telecom operators are able to raise tariffs. This is because on an incremental basis, each of the top three GSM players is adding about the same number (i.e. one third) of new subscribers. Thus, the focus is on maintaining voice ARPU and growing data ARPU. Idea is following the same strategy. Unfortunately, new customers can only be added at lower tariffs. Hence, higher growth will end up putting increasing pressure on rates. With the looming threat of Reliance Jio launching services this year, competitive intensity can only be expected to rise.

In the recently concluded auctions, Idea won back the entire spectrum that was due to expire in December 2015 and April 2016. Thus, the company has ensured business continuity for the next 20 years. The company has to shell out about Rs 301 bn (plus 10% interest) for the same. The upfront payment was to the tune of Rs 77.34 bn which has already been paid. The higher interest outgo as well as increased depreciation for the spectrum assets will impact growth of the bottomline going forward.

The fundamentals of Idea Cellular remain strong. The uncertainty surrounding the auctions is now behind it. The key challenge for the company is to maintain the growth rate in subscriber additions and increase ARPU at the same time. This is far from an easy task when both voice and data rates are under pressure. Maintaining operating margins at these high levels will also not be easy. Then there will be pressure on the bottomline due to the higher interest outgo as well as higher depreciation going forward.

In the last result update we had asked investors not to buy the stock due to the inherently risky nature of the spectrum auctions. Once the auction results were announced, the stock witnessed a sharp run up and an equally sharp correction. We are currently updating our financial estimates for the company keeping all the above factors in mind. Post the same; we will inform investors about our view on the stock.

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